This example shows how excess events can arise on a policy where there has been more than one payment of premium and how unused net allowable payments are carried forward to later years.
Each ongoing insurance year runs from 10 January to 9 January of
the following year.
Year 2 (10 January 2002 to 9 January 2003):
The allowable element is 2 x 5% x £10,000 = £1,000.
Since the amount of the part surrender (£500) does not
exceed the net allowable element, no excess event arises for this
year.
Year 5 (10 January 2005 to 9 January 2006):
The total of allowable elements is (5 x 5% x £10,000) +
(3 x 5% x £5,000) = £3,250, that is 5 years’
allowance relating to the initial premium and 3 years’
relating to the later premium. No allowable elements were
previously taken into account, as there have been no previous
excess events, so net total allowable payments is £3,250.
Net total value of parts surrendered is £500 +
£4000 = £4,500. This exceeds the net total allowable
payments by £1,250 therefore an excess event arises at the end
of the insurance year on 9 January 2006 and the amount of gain is
£1,250.
Year 7 (10 January 2007 to 9 January 2008):
Total allowable elements is (7 x 5% x £10,000) + (5 x 5%
x £5,000) = £4,750. Allowable elements of £3,250
were taken into account on the excess event in year 5 so net total
allowable payments is £1,500.
Total value of parts surrendered is £500 + £4,000 +
£3,000 = £7,500 but part surrender values totalling
£4,500 were brought into account on the excess event in year 5
so must be deducted. Therefore, the net total value of parts
surrendered is £3,000.
This exceeds net total allowable payments, so an excess event
arises on 9 January 2008 and there is a chargeable event gain of
£1,500.
| Further reference and feedback | IPTM1013 |
